Rogge Corporation makes a specialized sensor that is used in testing equipment. The company is organized in two divisions: Assembly and Shipping. Managers in both divisions are evaluated as profit centers using divisional income. Orders are received in Shipping. All orders consist of 100 units. If a customer wants 150, for example, an order of 200 units has to be placed. Each order is produced separately. The initial step in production takes place in Assembly, which then transfers the unfinished part to Shipping. Shipping conducts tests and calibration, applies labels identifying the customer and the date of shipment, and sends the part to the customer.

Production costs in Assembly consist of three factors. Setup costs of $10,000 are incurred for each order. Direct materials, direct labor, and variable overhead amount to $175 per unit. The third factor is fixed manufacturing overhead, which consists of depreciation ($1,800,000 annually) and fixed cash overhead ($640,000 annually). Production costs in Shipping are made up of direct labor ($100 per unit), variable overhead ($60 per unit), and fixed overhead of $2,400,000 annually.

Required

a. What is the optimal transfer price per unit for units transferred between Assembly and Shipping?

b. Write a short memo explaining your recommendation in requirement (a), including support for the existing price, if that is your recommendation. Include visual support for your recommendation.